What would a free society look like? That is, what if everyone were free to live his life the way he wanted, so long as his conduct was peaceful, and free to enter into any mutually beneficial exchanges with anyone in the world — a totally free, unhampered market economy?
The answer is that there is no way to predict the outcome of such a society. No one can accurately guess the results of the choices of millions of people. But while no one can predict the actual outcome of a market economy, the economic results are usually nothing short of phenomenal — what we might call the “miracle of the market.”
The late Leonard E. Read, founder of The Foundation for Economic Education, once wrote an essay entitled “I, Pencil,” in which he made the following startling observation: No one in the world knows how to make a pencil. Imagine that — the world is filled with pencils, but no one knows how to make them.
What was Read’s point? If you asked the CEO of the world’s largest pencil manufacturer how to make a pencil, he would say, that they get the “lead” (it’s not really lead — it’s graphite) from Sri Lanka. It’s mixed with clay from Mississippi, using sulfuric tallow, which is animal fats chemically reacted with sulfuric acid.
Then he’d tell you about what goes into producing the wooden part of the pencil, including the logging operations in different parts of the world. And he’d explain the creation of the lacquer that goes onto the wood — and how producers of castor beans and refiners of castor oil play a major role here. What about the brass part? He’d tell you about miners of copper, zinc, and nickel in different parts of the world and try to explain their operations.
And what about the eraser? He’d explain that it’s made from a reaction between rape seed oil and sulfur chloride from Indonesia.
And what about the equipment that is a necessary part of all of these operations? How is that made? He probably couldn’t answer that one.
The point Read was making is that no one person knows the answer to all of these questions. And if no one knows how to make a pencil, then certainly no one knows how to make automobiles, jet planes, computers, and so forth.
Yet, the world is filled with these marvelous devices!
How does this happen? It happens with people in different parts of the world acting in their own self-interest and coordinating their plans with others.
Each person in the process of production tries to make a living and improve his economic well-being. He doesn’t say to himself, “Golly, the world needs pencils; I’d better be a good human being and do my part.” For example, take a person who is looking for a job in Sri Lanka because his family needs to eat. He goes to the local graphite company and asks whether they have a job available and, if so, what the pay is. The company offers him employment, he accepts, and he helps to produce graphite that is ultimately shipped to the United States, where it is used to make pencils.
The worker may never know that his efforts resulted in the production of millions of pencils. What might matter to him is simply that he did a good job at his graphite-producing job. In other words, while his work certainly does improve the lot of mankind through the ultimate production of pencils, that is not the goal of the worker. He’s simply trying to make life more prosperous for himself and his family.
And notice that millions of pencils come into existence without a decree from the U.S. government pronouncing that pencils must be produced. That is, there is no central government plan for the production of pencils. There is not some bureaucrat in Washington designing this enormously complex system in order to ensure the continued production of pencils. As Friedrich A. Hayek pointed out, the unhampered market economy produces outcomes that are the results of human action but not of human design.
The 19th-century French free-market advocate Frederic Bastiat described this phenomenon in an essay describing how Paris gets fed. The principles in that essay could be applied to any community in the United States.
For example, consider grocery stores in San Antonio, Texas. They are always filled with food, both perishable and nonperishable. There always seems to be enough for everyone who walks into the store.
Think about the “danger” involved here: there is no government agency anywhere in the United States or Texas that is planning, directing, or guaranteeing this phenomenon. Yet, no one (as far as I know) paces the floor in his home each night, unable to sleep, saying: “Oh, my gosh, what if the food doesn’t get delivered tomorrow to the grocery stores in San Antonio? What if they forget to order the broccoli? What if someone forgets to plant beans? How do they know the right quantities? What if there’s a run on tomatoes? What if the grocery stores simply refuse to open? Oh, my gosh, we need the government to guarantee us that the right food, in the right quantities, will be available at the right time. Why doesn’t my congressman do something?”
So, how do the grocery stores do it? Well, grocery store owners don’t open their stores because they love mankind or because they don’t want to see people starving to death. They do so because it is a way that they can make money and improve their own well-being. And in the process of seeking their own interest, they serve the needs of everyone else!
And they do that by coordinating their plans with millions of others who are doing the same — the farmers, the equipment manufacturers, the warehousers, the transporters, the middlemen, the secretaries, and on and on. Each person, seeking to improve his own life by making money, effects an outcome that is no part of an overall design. And what a remarkable, even miraculous, outcome it is! Grocery stores in every community across America filled with fresh food at relatively inexpensive prices — and all without a government agency planning it or guaranteeing the outcome!
One of the principles taught in public schools across America is that the free market is fine for simple, poor societies but that when things get complex, government is needed to provide the planning. But the principle is false. The more complex and prosperous a society becomes, the more necessary it is that government be prohibited from meddling.
For example, assume that President Clinton and the Republican Congress agreed to the creation of a U.S. Department of Food. (Before you automatically conclude that this is ridiculous, remember that Democrats and Republicans have already established a Department of Agriculture and a Food and Drug Administration.) The purpose of the Department of Food would be to assume the responsibility for planning the production and distribution of food in America. After all, the argument would go, if the government is necessary to plan something as important as education, then it should certainly plan something even more important — food. (If people starve to death, they won’t learn as well.)
Will the government do a better job than the market? The result would be an unmitigated catastrophe. The outcome would be what Ludwig von Mises called “planned chaos.” Why? Because as Hayek points out, the central planners can never — not even with the use of millions of computers — possess the same amount of knowledge that exists in the heads of millions of individuals all over the world.
In his remarkable essay “The Use of Knowledge in Society,” Hayek pointed out that an unhampered market economy takes advantage of the knowledge that people possess within their own particular set of circumstances. And since life is constantly changing for everyone, each person is best equipped to adapt to the changes by utilizing his own particular bit of expertise.
For example, suppose a piece of equipment breaks down in a machine making the pencil erasers. The foreman knows a guy around the corner who knows exactly what to do to solve the problem. He sends someone to get him. When the guy arrives, he asks for $50 to effect the repair. The foreman knows whether the price is reasonable in light of the immediate problem.
Multiply this by millions of these types of occurrences all over the world. How would central planners know the best approach to such things in a constantly changing world? The central planners possess only the knowledge that is in their particular heads plus “frozen” knowledge found in computers. There is no way that they can match the knowledge that is possessed by millions and millions of individuals, each of whom is having to adapt to ever-changing conditions.
The results of a central plan promulgated by the Department of Food would be the same as it is in other areas that government plans (education, monetary, postal delivery, etc.): lousy! And, in fact, that’s exactly the case in Cuba, North Korea, and China, where the government does plan the production and distribution of food in the country.
Generally, people have faith in the marketplace when they can see it work. That’s the reason that a politician or a bureaucrat would have a tough time persuading Americans to let him establish a Department of Food. But the problem is that people have a very difficult time transferring this faith to operations that government currently runs. For example, it would be extremely difficult to persuade North Koreans to give up central planning of food. They would say: “But how can we be certain that there will be the right quantities of food, that it will be of good quality, and that it will be sold at a reasonable price? Food is too important to be left to the free market.”
And it’s the same with Americans’ attitude toward, for example, education: “Look, the market’s fine for food, but not for something as important as education. How could we be certain that enough schools would be built, that they would be of the sufficient quality, and that they would be reasonably priced? Education is just too important to be left to the free market.”
The sad fact is that all too many people all over the world lack faith in the market economy, which means that they lack faith in themselves and in others.
And the advocates of government planning always put the matter in terms of plan versus no plan. The suggestion is that if government didn’t plan important areas of human activity, there would be chaos. “If government didn’t plan the delivery of mail, there would be chaos! If government didn’t plan education, there would be chaos! If government didn’t plan monetary affairs, there would be chaos!”
But the advocates of central government control are wrong on two counts: first, it is government intervention that creates chaos in people’s lives because it interferes with what people want to do.
Second, while the market economy is not the result of human design, that doesn’t mean that the market process itself is unplanned. On the contrary, the market economy consists of the individual plans of millions of people, each of whom coordinates his plans with others, with a phenomenal result that no one person could have ever devised.
How do these millions of people coordinate their plans in an unhampered market economy? Do all of the people who are involved in the production of pencils get together at annual conventions to plan their respective roles? No. The answer lies in the market economy’s simple and complex system of communication.